Paulson & Co. PFR Gold Fund Fell 16 Percent in September

Hedge-fund manager John Paulson started the PFR Gold Fund in 2010 with the expectation that the Federal Reserve’s asset purchases would ultimately trigger inflation and stoke demand for bullion and related securities. Photographer: Jin Lee/Bloomberg

Oct. 21 (Bloomberg) -- Hedge-fund manager John Paulson’s
PFR Gold Fund fell 16 percent in September after bullion and
related stocks declined, according to a report to investors
obtained by Bloomberg News.

Last month’s loss brings the 2013 decline in the $350
million fund, which invests in gold stocks and derivatives, to
62 percent, according to the report from the New York-based
firm. Bullion producers fell 9.4 percent and the metal dropped 5
percent in September after a Federal Reserve policy maker said a
small reduction in bond purchases may occur in October and the
threat of a U.S. attack on Syria eased.

Paulson, 57, best known for making $15 billion for clients
in 2007 by betting against subprime mortgages before the housing
collapse, started the PFR Gold Fund in 2010 with the expectation
that the Fed’s asset purchases would ultimately trigger
inflation and stoke demand for bullion and related securities.
Paulson & Co. is sticking to that conviction even as strategists
including Goldman Sachs Group Inc.’s Jeffrey Currie said gold is
a “slam dunk” sell for next year.

“While actual inflation and inflation expectations remain
subdued, we continue to believe we are at risk of high inflation
in the future,” Paulson & Co. wrote in the report. “Our long-term thesis remains consistent,” even though gold prices have
remained volatile, the firm said.

Gold Tumbles

Gold has tumbled 21 percent this year as some investors
lost faith in the metal as a store of value, wiping $61.7
billion from the value of bullion-backed exchange-traded
products, amid a rally in U.S. equities to a record and low
inflation. Bullion will average $1,250 this quarter, dropping to
$1,225 in the first three months of 2014 and $1,195 in the
following period, according to respondents in a Bloomberg
survey.

Currie, Goldman Sachs’s head of commodities research who
correctly forecast this year’s rout, said Oct. 8 that gold
prices will again fall next year because the U.S. economy will
strengthen after lawmakers resolve the stalemates over the
budget and debt ceiling. Goldman expects prices to be at $1,050
at the end of 2014.

Federal Reserve Bank of Chicago President Charles Evans, an
advocate of monetary stimulus, said today in a CNBC interview
that fiscal strife in Washington will probably delay the central
bank’s tapering of its monthly bond purchases. The Fed on Sept.
18 maintained the pace of buying.

Long-Term Thesis

Paulson’s main strategies are rebounding from losses tied
to gold and two years of wrong-way calls on the economy. His
firm still believes quantitative easing will lead to inflation
and that the price of bullion will be supported by demand from
China and India and a diminished supply of recycled gold,
according to the report.

The firm, which “would not be surprised if gold were to
trade sideways over the near term,” expects the metal to trade
“materially higher” when indicators start to show rising
inflation, it wrote in the report.

In months when gold rises, the PFR Gold Fund can outperform
bullion, the firm wrote in the report. In July, the fund climbed
14 percent, outpacing the metal’s 7.3 percent increase, and in
August the fund rose 12 percent, more than gold’s 6.3 percent
gain, Paulson & Co. said.

The PFR Gold Fund takes its name from the initials of
Paulson and gold specialists Victor Flores and John Reade and is
composed of mostly Paulson’s own money. Armel Leslie, a
spokesman for the $18 billion Paulson & Co. at WalekPeppercomm,
declined to comment on the report.